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Cambodia: Risk Assessment

Country Risk Rating

C

A very uncertain political and economic outlook and a business environment with many troublesome weaknesses can have a significant impact on corporate payment behavior. Corporate default probability is high.

Business Climate Rating

D

The business environment is very difficult. Corporate financial information is rarely available and when available usually unreliable. The legal system makes debt collection very unpredictable. The institutional framework has very serious weaknesses. Intercompany transactions can thus be very difficult to manage in the highly risky environments rated D.

Strengths

Flexible textile industry and tourism sector with strong potential

Potential offshore hydrocarbon reserves (oil and gas)

Financial support from bilateral and multilateral donors

Regional integration (ASEAN)

Weaknesses

Considerable share of agriculture in GDP; vulnerable to climatic uncertainties

Underdeveloped electricity industry and transport networks

Lack of skilled manpower

Dependence on concessional finance due to weak fiscal revenues

Significant governance shortcomings

High poverty rate

Current Trends

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Growth still high in 2016

Cambodia's growth rate is set to remain strong in 2016, with the country expected to benefit from a stabilization of the political and social situation. The return to calm should boost foreign direct investments, tourism as well as industrial production, which was disrupted by strikes in 2015. The tourism sector, for its part, will continue to benefit from the rapid growth in gambling services. However, investment will remain constrained by the country's infrastructure shortcomings, especially regarding energy, and by the poor education system. The agricultural sector, which employs two-thirds of the economically active population, will be impacted by the fall in commodity prices. In addition, the textile sector, which represents over 75% of exports, faces several challenges. It has been weakened by the different increases in the minimum wage and competition from other low-cost countries like Myanmar, while the currency's alignment with the US dollar affects the price competitiveness of Cambodian exports in a context of a strengthening dollar. Nonetheless, the presence of trade unions and co-operation with the International Labour Office have helped the country improve working conditions in the textile sector thus enhancing Cambodia's image.

Moreover, rapid expansion in the construction sector will continue to support growth. Furthermore, household consumption is expected to remain buoyant, benefiting from the rise in the minimum wage and low inflation.

The current account balance remains in deficit and the country still depends on foreign aid

In 2016, the country's trade balance will remain in deficit, with the value of capital goods and oil products remaining high despite the fall in oil prices. The high level of international aid and remittances by expatriate workers will offset the repatriation of dividends by foreign companies, which occupy a significant place in the textile sector. Further, foreign direct investments are growing steadily and make it possible to fund the current account deficit.

As regards the public accounts, the budget deficit is expected to continue to fall, as the country suffers from deficiencies in tax collection. Nonetheless, the government has introduced a fiscal consolidation policy and the public accounts are benefiting from the dynamism of the economy. In this context, public debt should stabilize. Nevertheless, the public finances will remain highly dependent on foreign aid (17% of revenues and 3% of GDP).

Meanwhile, credit is growing rapidly and the banking sector remains weak because of inadequate supervision. At the same time, the economy as a whole is highly dollarized and foreign currency deposits account for almost all deposits. The banks are therefore highly exposed to exchange rate risks.

Return to a fragile calm on the political scene

In the parliamentary elections of July 2013 the Cambodian People’s Party (CPP) led by Prime Minister Hun Sen won a greatly reduced number of seats and the Cambodia National Rescue Party (CNRP) disputed the elections and refused to sit in parliament for nearly a year. The opposition benefits from Hun Sen’s weariness, from the social tensions over wrongful expropriations and working conditions in the textile sector. The country has thus experienced large-scale demonstrations, forcefully repressed by the ruling powers. In July 2014, a fragile agreement was made between the CPP and the CNRP and the opposition candidates, now sitting in parliament. This agreement provided particularly for the award of the position of vice-president to a CNRP delegate and for a government commitment to combat endemic corruption, but disagreements between the government and the opposition are frequent. Without consulting the opposition, the prime minister decided to postpone the 2018 elections by five months. Nonetheless, the two parties have reached an agreement on the changes to be made to the electoral law.

Meanwhile, although the trade unions are not united, there could be new demonstrations as the increase in the minimum wage for 2016 was lower than they expected.

Finally, the business climate is still marked by a lack of transparency, considerable legal instability and a high level of corruption.